Book4: Warren's 15% rule.

Reference: "How to pick stocks like Warren Buffett" chapter-12.

Warren is interested only in those stocks where he expects 15% or above return in long (say 10Y) period. This is how he isolates the attractive equities....

For instance if you are looking for IBM stock on 8/1/2008 then you would need following information.

• What is the avg P/E ratio ? Let's say it is=15.11
• What is the Earning ? Let's say it is = $8.11
• What is the Earning growth rate ? Let's say it is: 11.21% (reference).
• What is the price today (8/01/2008) ? Let's say it is: $128.00
• What is the dividend (if any) rate ? Let's say for IBM it is 25% of the Earning.

So at this rate, in next 10Y the earning will grow to (using TVM formula) $23.47/year. That makes dividend=$5.87. So total earning = 23.47 + 5.87 = $29.34.

So at current P/E rate the price of the IBM stock will be = (P/E) * (Earning) = 15.11 * 29.34 = $443.29.

On the other hand, for stock to return 15% return on your investment of $128, we need to have (using TVM formula) $ 517.83. So, we have a big gap between what is expected ($517.83) and what can be achieved ($443.29).

If we are going to get $443.29 price after 10Y then to get 15% return the expected price should be: $109.57 (on 8/1/2008). This value will compensate investor from inflation, tax, commission and risk-free return.

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Let's take the example of AXP (American Express)...

• 8/1/2008 price: $36.73
• P/E = 12.17
• Earning = $3.02
• Earning growth rate = 12.5%
• Dividend = ~24%

So, after 10Y earning = $9.80 and 10Y dividend=$2.35. Total E=9.80+2.35=$12.15.
So, at current P/E rate, after 10Y the price would be = (P/E) * E = 12.17 * 12.15 = $147.87

Now, at the current price and 15% expected return the 10Y price should be=$148.59. Ideally speaking, to get 15% return today the AXP should be priced at $36.7292, almost what is it right now. Assuming that all above assumptions hold true any price below $36.73 will be attractive to get 15% return.

However, financial market is going through some tough time so probably this price might not compensate for any upward risk in credit market.

There will be more blogs on the topics related to Warren's investment philosophy. So keeping watching.

Balance Sheet of Warren's life

(My review in Amazon on the book "Buffett: The making of an American capitalist" by Roger Lowenstein. ISBN:0-679-41584-X)

I hand picked this book with the intention to know more about Mr. Buffett and this book has very well satisfied my appetite. In a very lucid way book is walking you along different phases of Warren's life. By the time I reached the last chapter, it has changed my perception about Warren's investment philosophy. In the media, Warren is portrayed at stanch follower of the theory proposed by Professor and investor Ben Graham but that it not entirely true ! Though his investing endeavor (which started in 1943, at the age of 13) is heavily influenced by Ben (since his college years in Columbia), he has adapted to the market dynamics and made choices which Ben wouldn't have made. The best part I found with Buffett is, he has always invested as a businessman rather then gambler/speculator and maintained his originality.

The book's front and back flap has summarized the book very well. Amazon hasn't provided that in "search inside" so putting it here (copyrights by Roger Lowenstein and Random House Inc.):-

"Starting from scratch, simply by picking stocks and companies for investment, Warren Buffett amassed one of the epochal fortunes of the twentieth century--an astounding net worth of $10 billion, and counting. If you had been among the lucky few sitting in his study of Omaha at the start of his career in 1956, and had invested $10,000 with him and kept your money with him throughout , your original investment would be worth $80 million today. That awesome record has made him a cult figure popularly known for his seeming contradictions: a billionaire who has a modest lifestyle, a phenomenally successful investor who eschews the revolving-door trading of modern Wall Street, a brilliant deal-maker who cultivates a homespun aura.

But just who is the Oracle of Omaha, and why is he so successful ? In his illuminating biography, journalist Roger Lowenstein drawn on three years of unprecedented access to Buffett's family, friends, and colleagues to provide the first definitive, inside account of the life and career of this American original. 'Buffett' reveals a man whose conscientiousness, integrity, and good humor exist alongside an odd emotional isolation. It shows how Buffett's investment strategy--a long-term philosophy grounded in buying stock in companies that are undervalued on the market and hanging on until their worth invariably surfaces--is a reflection of his inner self.

Intelligent and offbeat, Buffett was obsessed with money-making from childhood. His parents (particularly his stockbroker/political father) were demanding but instilled in him self-reliance and honesty. As an undergraduate at Wharton, Buffett knew as much about economics as his teacher did -- but at Columbia Business School he met Professor Ben Graham, whose investment philosophy he adopted and then improved on with his own particular genius. 'Buffett' masterfully traces its subject's life: his enormously successful partnership, his early, inspired investments in American Express and Geico, his companionship and investment with Katherine Graham of the Washington Post, his role in the Capital Cities purchase of ABC, his unique relationship with his wife and his mistress, his rescue of the scandal-ridden Saolomon Brothers. Lowenstein paints Buffett as the antithesis of the reckless mentality that fueled the financial debacle on Wall Street at the end of the 1980s, and shows him to be a man of lifelong reach for stability and security. In outlining the character traits and financial philosophy that made Buffett the country's richest man, 'Buffett' presents a landmark portrait of a uniquely American life. "

Though book has very good account of W. Buffett, it could have been written better. I will reserve 5-stars for authors such as George Anders and Uresh Vahalia. I wish I could give 4.5 starts to this book.

Book's review

For last couple of months I was deliberating on creating some simple database or spread sheet which could list the books I read and allow me to jot some points on the books I enjoyed reading. Just yesterday, thought came to mind that it would be better to have this in the form of a Blog--- it will be good for my reference and easy to share.

So here it is...I will try with the books I read recently and if relevant (means if my memory helps me), I will give my brief review about these books.

Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change by Louis Gerstner
(ISBN-13: 978-0060523800)

I found the language of this book very simple and flow was fun to follow. My current tenure with IBM (as of now) made me more interest in reading some of the chapters. I enjoyed first few chapters where Louis Gerstner was describing his early tenure at IBM and cultural shock he got. However, later part of the book was getting less interesting for me, and Louis was playing more diplomatic executive role. I would give 3 out of 5 point for the msg and value this book conveyed.
(5th-20th Apr 2007)

Buffett: The Making of an American Capitalist by Roger Lowenstein
(ISBN:0-679-41584-X)
I have already talked about this on my other blog...so if interested read it here...


The World Is Flat: A Brief History of the Twenty-first Century
by Thomas Friedman (ISBN: 978-0374292799)

Surely an interesting book and worth reading. In most part, Thomas has good
observation and vision of future trend in new globlonomy, however at at some point he talks like a fiction book author! Just as many other articles, this book/author is very ambitious about India's growth but I would like to take it with pinch of salt.